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Public Version of Application
COMMERCE ACT 1986: BUSINESS ACQUISITION
Section 66: Notice Seeking Clearance
The Registrar Business Acquisitions and Authorisations Commerce Commission PO Box 2351 WELLINGTON and email: [email protected]
Pursuant to section 66(1) of the Commerce Act 1986 notice is hereby given seeking clearance of a proposed business acquisition.
PART 1: TO BE COMPLETED BY ALL APPLICANTS
THE BUSINESS ACQUISITION
1. The business acquisition for which clearance is sought
1.1 The business acquisition for which clearance is sought is the acquisition by Solid Energy New Zealand Limited or a wholly-owned subsidiary (“Solid Energy”) of the entire share capital in Newvale Coal Co Limited (“Newvale” or “Company”) pursuant to the agreement for sale and purchase dated 18 August 2006 attached as Appendix A (“Agreement”).
1.2 The acquisition of the shares in Newvale and its assets referred to in 1.1 above means the entire undertaking of the company including all assets and liabilities of the Company including but not limited to mining licences, permits, consents, feasibility studies and mining information, all plant and equipment and all other property and interests acquired or held by or on behalf of the Company.
1.3 In broad terms, the grounds on which Solid Energy contends that the Commission should give a clearance in respect of the proposed acquisition are:
1.3.1 Approximately [ ] of the coal produced from the Newvale mine is sold to [ ] under a coal supply contract [
]
1.3.2 All of the coal produced from the Newvale mine is lignite coal. The relevant market for consideration is the mining and distribution of lignite and sub bituminous (together referred to as thermal) coal in the southern half of the South Island (including South Canterbury). In this application “thermal coal” means lignite or sub-bituminous coal or blends which may also include bituminous coal;
1.3.3 the acquisition will not result in a substantial lessening of competition by Solid Energy in the above market due to constraints imposed by competitors (domestic and international), the possibility of new entrants, the fact that
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thermal coal may be blended with higher calorific value bituminous coals, the low cost of entry into lignite mining and constraints from other energy sources;
1.3.4 all other current suppliers in the market have the potential to increase production in response to any attempt by Solid Energy to restrict supply and/or increase the price of thermal coal;
1.3.5 Solid Energy’s Ohai opencast mine in Southland has approximately [ ] tonnes of economically recoverable reserves of sub-bituminous coal remaining. Its principal supply customer is [
]
1.3.6 the recent acquisition (September 2006) of the Straith mine at Ohai by Eastern Corporation Limited (Eastern) demonstrates that new competitors are coming into the market. It is Eastern’s stated intention to have this mine produce 100,000 tonnes of thermal coal annually (from a total in ground resource of 2.85 million tonnes). Operations are due to commence in October 2006.
NOTICE
2. Who is the person giving this notice?
2.1 This notice is given on behalf of Solid Energy New Zealand Limited:
2 Show Place Addington PO Box 1303 Christchurch
Telephone: (03) 345 6000 Facsimile: (03) 345 6016 Attention: Warren Maslin (email: [email protected])
With all correspondence to: Lane Neave Lawyers PO Box 13149 Christchurch
Telephone: (03) 364 6453 Facsimile: (03) 379 8370 Attention: Bill Dwyer (DD: (03) 364 6459) (email: [email protected].)
CONFIDENTIALITY
3. Do you wish to request a confidentiality order for:
3.1 The fact of the proposed acquisition?
No.
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3.2 Specific information contained in or attached to the notice?
Yes, the information deleted on the attached “Public Version” of this notice (Confidential Information).
3.2.1 If so, for how long?
Until the applicant and Newvale notify the Commission in writing that particular information is no longer confidential to the participants.
3.2.2 Why?
The Confidential Information that has been deleted is commercially sensitive and contains valuable information which is confidential to the participants. The information includes market share information from internal analysis carried out by Solid Energy and, in the event the acquisition does not proceed, disclosure of the information would give an unfair advantage to the participants’ competitors. Disclosure of these commercial assessments would also affect Newvale’s commercial position.
In respect of the Confidential Information the applicant and Newvale seek a confidentiality order under section 100 of the Commerce Act 1986, on the grounds that the information is commercially sensitive and valuable information which is confidential to the participants and disclosure of it is likely to give an unfair advantage to competitors of the participants and/or unreasonably prejudice the commercial position of the participants.
In respect of the Confidential Information the applicant and Newvale each claim confidentiality under section 9(2)(b)(ii) of the Official Information Act 1982. The applicant and Newvale each request that they be notified of any request made under the Official Information Act for release of the Confidential Information, and that the Commission seek their views as to whether the Confidential Information remains confidential and commercially sensitive, at the time responses to such requests are being considered.
DETAILS OF THE PARTICIPANTS
4. Who are the participants (i.e. the parties involved)?
4.1 The participants are:
4.1.1 Solid Energy as the acquirer, and
4.1.2 Marie Elizabeth Highsted and Reginald John Highsted (as trustees of the Reg and Marie Highsted Family Trust), Paul Timothy Highsted, Brett Richard Highsted and Mark Reginald Highsted (as trustees of the Bret Highsted Family Trust, and of the Paul Highsted Family Trust, and of the Mark Highsted Family Trust) as vendors.
ACQUIRER
4.2 The contact details for Solid Energy are: Solid Energy New Zealand Limited 2 Show Place Addington PO Box 1303 Christchurch
Telephone: (03) 345 6000
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Facsimile: (03) 345 6016 Attention: Warren Maslin (email: [email protected])
VENDOR
4.3 The contact details for Newvale Coal Co Limited: P O Box 151 Gore
Telephone: (03) 208 9485 Facsimile: (03) 208 9457 Attention: Bret Highsted (email: [email protected])
With all correspondence to: Anderson Lloyd Cauldwell 481 Moray Place Private Bag 1959 Dunedin
Telephone: (03) 471 5440 Facsimile: (04) 477 3184 Attention: Paul Hubbard (email: [email protected])
5. Who is interconnected to or associated with each participant?
ACQUIRER
5.1 Solid Energy is a private company and a state-owned enterprise. The shareholders of Solid Energy are:
Trevor Colin Mallard 30,450,000 shares - 50% (Minister for State Owned Enterprises) Michael John Cullen 30,450,000 shares - 50% (Minister of Finance) 100%
Companies Interconnected or Associated with Solid Energy are:
Coalcorp Insurance Services Limited Waikato Mining and Contracting Limited Coal Bed Methane Limited Terrace Coal Mine Limited Coal New Zealand Limited Coal New Zealand International Limited Solid Energy Renewable Fuels Limited Windflow Technology Limited
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We attach as Appendix B a diagram outlining Solid Energy’s shareholdings in the above companies.
5.2 We attach the following documents as Appendices C and D respectively by way of background information:
5.2.1 Solid Energy’s Interim Report for the six months ending 31 December 2005; and
5.2.2 Solid Energy’s Statement of Corporate Intent 2005.
VENDOR
5.3 Newvale is a private company, being wholly-owned by:
5.3.1 Marie Elizabeth Highsted and Reginald John Highsted (as trustees of the Reg and Marie Highsted Family trust) to the extent of 366,862 shares;
5.3.2 Paul Timothy Highsted, Brett Richard Highsted and Mark Reginald Highsted (as trustees of the Bret Highsted Family Trust) to the extent of 183,430 shares;
5.3.3 Paul Timothy Highsted, Brett Richard Highsted and Mark Reginald Highsted (as trustees of the Paul Highsted Family Trust) to the extent of 183,430 shares; and
5.3.4 Paul Timothy Highsted, Brett Richard Highsted and Mark Reginald Highsted (as trustees of the Mark Highsted Family Trust) to the extent of 183,430 shares.
6. Does any participant, or interconnected body corporate thereof, already have a beneficial interest in, or is it beneficially entitled to, any shares or other pecuniary interest in another participant?
6.1 In respect of Solid Energy: No.
6.2 In respect of Newvale: No.
6.3 Additionally none of the directors of Solid Energy hold directorship in any company which is involved in the market in which the business of Newvale operates.
7. What are the business activities of each participant?
SOLID ENERGY
7.1 In broad terms, Solid Energy undertakes the following business activities:
7.1.1 Solid Energy is a state-owned enterprise formerly called Coal Corporation of New Zealand Limited. Solid Energy is in the business of mining and processing coal and marketing and distributing that coal for the domestic and export market.
The mining operations are based around Huntly in the Waikato, Greymouth, Reefton and Westport on the West Coast and Ohai in Southland. Its
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operations are backed by service and support centres in Christchurch. Solid Energy produces about 4.5 million tonnes of coal annually. Solid Energy is the coal supplier for New Zealand Steel Limited’s Glenbrook Steel Mill near Auckland and a major supplier to the Huntly Power Station. The major export industries of dairy and meat use Solid Energy coal as an energy source. Solid Energy is also a major supplier to the New Zealand cement industry.
Internationally Solid Energy’s main customers are in Japan, China, India, Chile, Australia, South Africa and Europe. Export customers value the quality of Solid Energy coal, often blending it with lower grade coals to improve the overall quality of the coal blend used. Solid Energy mines and controls the quality of its coal to meet the specifications of its customers.
Exported Solid Energy coal is mainly used in steel production with a smaller amount used for electricity generation but there is also a market for specialist product. These specialist uses include the manufacturing of silicon metal, carbon fibre and activated carbon. Activated carbon is used in filters for liquid and gas purification. Carbon fibre is used to manufacture products such as fishing rods, golf clubs and tennis rackets. Silicon metal is used in many steel and aluminium alloys.
Solid Energy has no mines which produce lignite.
7.1.2 Further information on Solid Energy is available at www.solidenergy.co.nz
NEWVALE
7.2 The vendors are family trusts that have no other mining interests.
7.3 The Newvale mine has been operated by the Highsteds for three generations and is located on the Waimumu lignite coal field in Eastern Southland. Newvale mine produces approximately [ ] tonnes of lignite a year.
8. What are the reasons for the proposal and the intentions in respect of the acquired or merger business?
8.1 The reason for this proposal is to enable Solid Energy to bring its expertise in mine planning and extraction to bear on the mining activities at the Newvale mine. Solid Energy has the capital and resources to further develop the Newvale mine. From a commercial perspective, Solid Energy is well placed to further develop the Newvale mine on an economic basis. Solid Energy intends to retain the current workforce of 30 people.
8.2 [
]
8.3 Solid Energy presently operates an opencast thermal coal mine at Ohai, Southland producing sub-bituminous coal. [
] Solid Energy views the Newvale mine as the best option for remaining active in the Southland region albeit with a lower energy coal, but offset by being closer to existing major customers.. If a successful acquisition is concluded Solid Energy intends to bring the Newvale mine into its own operations. Solid Energy would assume responsibility under all of Newvale’s existing coal supply contracts and accordingly would be required to provide the same supply and services under these contracts. Many of the supply contracts have prices fixed for various terms with price escalation
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clauses referenced to external benchmarks. For example, [ ] The lignite is used as an energy source for Fonterra’s boilers. [ ] The prices payable to Newvale are [
]
8.4 In Solid Energy’s experience supply contracts are generally for a term of between one and two years. However, there is some demand from larger customers for terms of up to five years. For example, [
] Newvale’s supply contract with [ ] Also of note is a developing trend of several customers to go out to tender. For example, Fonterra’s Clandeboye Plant [ ] has called for tenders for supply at this plant from 2008. [ ] (see paragraph 13.10 below). Additionally hospitals are also commencing to tender their supply contracts. The move by larger users to tendering would substantiate the view by some coal purchasers that competition in the market is real and robust.
Overall, supply contracts and their negotiation are varied and are often driven by the particular needs of customers. Common to all supply contracts at the time of negotiation however is the price of coal and the quantities that are able to be supplied.
8.5 It is not the intention of Solid Energy to lessen, hinder or reduce competition in the relevant market. To the contrary, Solid Energy intends for there to be a continuity of supply services for purchasers of Newvale lignite.
8.6 From a competition point of view, the acquisition does not involve a reduction in competitive supply, nor does it result in any party taking advantage of market power in any relevant market, given that the supply from the Newvale mine is largely to existing contracted customers or will be to supplement or [ ] Solid Energy’s [ ] output from the Ohai mine to ensure continuity of supply for existing customers where they are able to use lignite.
8.7 The precise details on the proposed acquisition have been settled and subject to ordinary contract provisions for a transaction of this type. The structure of the acquisition is the sale of all of the shares in Newvale to Solid Energy. As provided in the Agreement there are a number of conditions requiring fulfillment. At the date of this application the parties do not foresee any impediments to fulfilling the conditions.
9. The New Zealand Coal Mining Industry
9.1 Background:
9.1.1 General characteristics of coal:
(a) Coal is a combustible, sedimentary, organic rock that is composed primarily of carbon, hydrogen and oxygen. Coal is formed from vegetation that has been consolidated between rock strata. It is altered by the combined effects of microbial action, pressure and heat over a considerable time period.
The physical and chemical properties of coal are determined by a number of factors including: the original vegetable matter, the degree of chemical alteration of the vegetable matter, and the length of time
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of geochemical alteration (coalification) of coal during burial. The influence of these factors determines the rank of the coal.
Peat is typically the first coal type that organic matter is transformed into during coalification. Peat is very high in moisture and low in carbon content. It is also the lowest quality of coal. Over time peat is transformed into lignite, which through continued coalification will become a sub-bituminous coal. As the process continues, the coal is transformed until it becomes more mature and reaches the classification of a bituminous coal. If conditions are right bituminous coal may mature into anthracite.
The degree of coalification (called “rank”) as it matures from peat to anthracite determines the coal’s physical and chemical properties. Lower rank coals like lignite and sub-bituminous are characterized by high moisture content and low carbon content. These coals are relatively low in energy. The higher rank coals like bituminous coals are generally harder, have greater carbon content, less moisture, and as a consequence are higher in energy.
As well as the process discussed above, which determines coal rank, the overall quality of coal is summarised by several general characteristics, including:
(i) Moisture content. Lower quality coals are usually characterized by high moisture content.
(ii) Ash content, which measures the remaining material after the coal is completely incinerated. Low ash coals are preferable to minimise ash disposal costs.
(iii) Fixed carbon percentage; an indication of coal rank which influences combustion characteristics.
(iv) Volatile matter percentage; another measure of rank which also influences combustion characteristics.
(v) Gross calorific value which is a measure of the energy content of the coal. Generally, lignite ranks less than 20 Gigajoules/Tonne (GJ/T), sub-bituminous coals between 20- 26 GJ/T and bituminous coals rank above 26 GJ/T.
(vi) Sulphur content, which indicates the amount of this undesirable contaminant.
(vii) Crucible swelling, which represents whether the coal has coking properties making it suitable for high value metallurgical markets. Only bituminous coals have this property.
The following table summarises coal quality from mines in various locations throughout New Zealand:
Figure 1 - Analysis of NZ Industrial Coal 2004
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Source: CRL Energy Limited – Analysis Update 2004
9.1.2 Location of coal in New Zealand:
New Zealand has known coal reserves in excess of 15 billion tonnes, over half of which is considered recoverable. Most of New Zealand’s recoverable coal resource in located in the South Island (93.5%). By far the largest proportion of the South Island’s coal resource is concentrated in Southland, which accounts for around 80% of New Zealand’s total recoverable coal resource. The Otago region holds 10.6% of recoverable coal reserves and 3.1% of New Zealand’s reserves are located in the West Coast region.
Coal reserves in the North Island account for 6.5% of New Zealand’s recoverable reserves. Almost all of this is located in Waikato (4.5%) while the remainder is found in the Taranaki. The following table summarises the location of New Zealand’s coal reserves by region.
Figure 2: Coal Reserves by Region
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North Island
Regions and coalfields Coal-in-ground resource Recoverable resource (Mt) (Mt)
Northland Region 2.5 -
Waikato Region 2078.7 714.1 Pukekawa 40.7 12.2 Whangamarino 28.9 8.7 Maramarua 233.2 101.9 Waikare 219.8 96.8 Huntly 1048.2 313.6 Rotowaro 70.9 48.7 Glen Massey 2.1 1.1 Whatawhata 3.7 2.9 Kawhia 181.9 59.2 Tihiroa 181.1 49.2 Te Kuiti 38.4 11.6 Mangapehi 29.8 8.2
Taranaki Region 379.9 173.5 Mokau 164.9 108.1 Aria 1.9 - Waitewhena 89.8 32.1 Ohura-Tangarakau 110.9 33.3 Retaruke 12.4 - North Island total 2461.1 887.6
South Island
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South Island regions Coal-in-ground Recoverable and coalfields resource (Mt) resource (Mt)
Nelson Region 1.5 -
West Coast Region 983.5 343.3 Buller 193.4 118.4 Inangahua 11.5 5.9 Reefton-Garvey Creek 25.2 11.6 Charleston 16.5 12.9 Pike River 94.3 28.3 Greymouth 543.9 163.5 Aratika 90.1 - Minor coalfields 8.6 2.7
Canterbury Region 3.6 2.2
Otago Region 2721.8 1154.2 St Bathans 1027.1 569.1 Roxburgh 248.3 156.1 Minor Central Otago coalfields 123.6 6.2 Ngapara-Herbert 4.5 3.6 Waihao 14.8 11.9 Shag Point 1.1 - Green Island 18.1 4.3 Kaitangata 1249.2 386.2 Pomahaka 35.1 16.8
Southland Region 9392.2 6256.4 Gore 304.4 244.1 Croydon 483.5 333.1 Waimumu 285.5 233.1 Mataura 2940.1 1944.9 Edendale 618.7 494.9 Morton Mains 1225.7 547.1 Waimatua 961.9 833.9 Ashers-Waituna 1356.6 746.1
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Makarewa 1026.8 820.9 Ohai 179.1 50.4 Orepuki 9.9 7.9
South Island total 13 102.6 7756.1
New Zealand total 15 563.7 8643.7
Notes: (1) In-ground coal is all coal that is contained in the seams within specified limits; normally thickness, quality and depth from surface.
(2) Recoverable coal, that part of the resource that can be recovered by mining.
(3) Measured coal refers to coal for which collected data allows reliable estimates of coal reserves.
(4) Indicated coal, for which data collected only allows a realistic estimate coal reserve to be measured.
Source: Ministry of Economic Development Report, 1994
As discussed above, by far the largest recoverable coal reserves are concentrated in Southland and Central Otago. Much of the coal in these areas are lignite reserves which have a lower energy content. The Ministry of Economic Development estimate that 83% of New Zealand’s recoverable coal reserves are lignite. Sub-bituminous coal reserves make up 13% of total coal reserves and are found in sites throughout the North and South Islands. Bituminous coal reserves, which are confined to areas along the West Coast of the South Island, make up the remaining 4% of New Zealand’s coal reserves.
Note: Our research indicated that 1994 is the most recent report outlining reserves and resources in NZ. The Ministry of Economic Development continue to use and rely on this data as indicated in its current Energy Data File (January 2006).
9.1.3 Coal Production in New Zealand:
New Zealand’s total coal production in the calendar year to 2004 was around 5.155 million tonnes, which was about 28% higher than in 2000. Solid Energy produced around four fifths of New Zealand’s coal production from 12 mines. A significant proportion of Solid Energy’s production is destined for export markets.
According to the Ministry of Economic Development, most of New Zealand’s coal production (as compared to reserves) is high quality bituminous and sub- bituminous coals. Of the 5.155 million tonnes produced in 2004, 49% was bituminous coal, 46% was sub-bituminous coal and the remaining 5% was lignite.
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Figure 3: NZ Coal Production by Rank 2004 Calendar Year
Lignite 5%
Bituminous 49% Sub-bituminous 46%
Source: MED Energy Data File (January 2006)
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Figure 4: % coal production by rank and mining method.
Source: MED Energy Data File – (January 2006) (mines larger than 100,000 tonnes per annum)
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Figure 5: Coal production by rank and tonnes
Source: MED Energy Data File – (January 2006)
Figure 6: NZ Coal Production by Mining Method 2004 Calendar Year
Underground 14%
Opencast 86%
Source: MED Energy Data File – (January 2006)
All bituminous coals are extracted from West Coast mines, the most productive being the Stockton mine, which produced 2.03 million tonnes of coal in the year ending 31 March 2006. The Waikato region produces the largest amount of sub-bituminous coals. In 2004 this region produced 2.05 million tonnes of coal. Smaller amounts of sub-bituminous coals were extracted from Southland and Otago. The predominant sources of lignite are
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in Southland and Otago, with smaller amounts extracted from Canterbury. The Southland and Otago regions produced 239,429 tonnes of lignite and 231,749 tonnes of sub-bituminous coal.
(a) Production method: Broadly, there are two alternative methods for extracting coal: opencast mining or underground mining. Opencast mining is usually employed when the coal is near the ground level and it can be easily extracted by removing the covering layer(s) of rock. Underground mining is employed to extract coal that is too deep for opencast mining to be economic. Typically, although not exclusively, older coal types including bituminous and sub-bituminous coals are found at greater depths than lignite and are more commonly extracted using underground mining methods.
Opencast mining methods tend to have more certain costs because with the coal close to the surface, more accurate mine plans can be produced. Production can be more variable with mining contracts priced on overburden moved or coal produced to meet market demand. Up-front mine development costs are usually lower with simpler processing facilities and a shorter lead time from mine development to coal production. Opencast mining is typically contracted to experienced earthwork contractors within the industry who match their equipment to the specific mine requirements at any given time.
Underground mining which accounts for 14% of coal production is typically more risky because unexpected geological conditions have an impact on costs. If coal seams are not located according to the mine plan (developed from the interpretation of the geological drilling work) more time and cost is incurred in removing rock to access the coal seam (capital costs when developing the mine) or to reconnect to the coal seam (expenses when operating the mine).
The mine development costs tend to be higher for underground mining than opencast methods because of the time and cost involved in driving access drives through rock to connect to the deep coal seams. Contracting out development and mining is less prevalent in New Zealand because of the geologically complex nature of the New Zealand coalfields and the consequential uncertainty and risks. Solid Energy does not contract out development and mining of any of its underground mines at the present time but contracts out development and mining of the majority of its opencast mines.
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[ ]
(b) Ownership of New Zealand coal mines: According to the Coal Research Association of New Zealand’s 1999 report on industrial coals, there were 23 registered mining companies with licences to operate 46 mining sites throughout New Zealand. Only 26 of these sites produced quantities of coal in excess of 10 thousand tonnes, and six sites were responsible for 77% of New Zealand’s 1998 coal production. Based on 1998 production data, Solid Energy produced 77% of New Zealand’s coal from ten sites. Coal production from smaller mines can vary significantly from year to year. Over the period 1998-2000 other major producers of coal included: Newvale Coal Co Ltd (5.7%), Glencoal Energy Ltd (7.4%), McDougall Mining Ltd (7.3%), Francis Mining Co Ltd (2.9%), Kai Point (2.1%) and Cascade (1.2%). In addition, there are several wholesalers of coal which sell a combination of coals into the South Island market.
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The following figure traces through the ownership of coal produced in New Zealand.
Figure 8: Coal Flows for Year Ended Sept 2005
Source: MED Energy Data File - January 2006
9.1.4 Coal consumption
According to the Ministry of Economic Development coal supplies approximately 8% of New Zealand’s consumer energy supply, the biggest domestic users being the Huntly power station (approx 2.5mtpa) and Glenbrook Steel Mill (approx 0.8mtpa). Coal is also used extensively in the dairy, cement, meat, timber and health industries and accounts for approximately 18% of domestic consumption of thermal coal. During the year 2005 coal provided approximately 12% of the total electricity generation mix by fuel type. By comparison, 3.8% was the total electricity generation mix by fuel type in the year ending March 2002. The change from gas to coal at Huntly power station has been the major contributor to this increase.
The commercial heating sector accounted for 4.1% of coal consumption, while horticulture, transport and residential sectors accounted for 1.9% (Source: NZ Coal Association Annual Review 2005/06).
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Figure 9: Coal Production Export Import & Consumption/Stockpiling to 2004
Coal Production, Exports & Import to 2004
6,000
5,000
4,000
3,000
2,000
Tonnes 1,000
0 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 -1,000
-2,000
-3,000
Exports Consumption or Stockpiled Imports Total Production
Source: MED Energy Data File - January 2006
Note: In 2005 imports increased to 1.1mt
(a) Coal exports:
According to the World Coal Institute (www.worldcoal.org) the total world hard coal production in 2004 was 4,629 million tonnes.
The international market for coal is divided into two main parts:
(i) the market for thermal coal, which uses coal in electricity generation and general industry; and
(ii) the coking coal market, which demands metallurgical grade bituminous coals to use in chemical, steel and iron manufacturing processes.
New Zealand is a small player in the international coking coal market. New Zealand exported around 2.1 million tonnes of coal in the 2005 year, which represents 1.2% of the international 2004 coking coal market. New Zealand exports of coal are predominantly high quality bituminous coal or coking coal.
All of New Zealand exports are produced from mines in the South Island’s West Coast region. Coals from this region exhibit special qualities, including low ash and low phosphorus content and high fixed carbon content and good coking properties, that make them internationally sought after for chemical and steel making processes. These properties make New Zealand coals highly attractive for blending with lower quality bituminous coals from all major coal
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producing countries and attract a premium price on international coal markets.
Most of New Zealand’s export coal has historically come from Solid Energy’s Stockton opencast mines in the Buller coalfield. Coal from Solid Energy’s Greymouth and Reefton mines has been exported in recent years, albeit in smaller volumes. Francis Mining Co Ltd also export small quantities of coal from its Greymouth mines. Approximately 60% of New Zealand’s coal exports go to Japan, with other major destinations including: China, India, Chile, Australia, South Africa and South America.
(b) Domestic coal consumption:
Around 4.1 million tonnes of coal was consumed domestically in the year ended September 2005. According to the Ministry of Economic Development, the North Island consumes approximately 83% of domestically available coal.
The most significant domestic consumers of coal are New Zealand Steel Ltd, which purchase around 20% of New Zealand’s domestic coal sales and Genesis Energy, which purchase 30% of all domestic coal. Other large domestic coal users include Golden Bay Cement (who import their coal from Australia) and Holcim. The dairy industry is also a significant consumer of coal in both the North and South Islands.
Figure 10: Domestic Coal Sales
Source: MED Energy Data File - January 2006
(i) Industrial coal users:
The steel, dairy and cement industries are the largest coal users outside of the electricity generation industry. Industrial (non-electricity) use in New Zealand is dominated by one user –New Zealand Steel Ltd at its Glenbrook Steel Plant.
New Zealand Steel Ltd uses sub-bituminous coal, all of which is obtained from Solid Energy’s Waikato coal mines. Internationally, New Zealand Steel Ltd is unique because
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they have developed special production methods specifically tailored to utilise the locally available coal and ironsand.
(ii) Blending:
Sub-bituminous or thermal coals are typically used industrially for heating and electricity generation because they are lower cost compared to higher quality bituminous coals. In addition, bituminous coals may not be generally suitable for furnace burning due to the high energy of these coals. In particular, there are two properties that make bituminous coals unsuitable for industrial process heating:
(A) Bituminous coals burn extremely hot and can melt furnace grates unless specifically designed for bituminous coals.
(B) Bituminous coals also emit greater amounts of pollutants compared to other coal types when burnt in industrial heating furnaces.
Despite these properties, the fact that they are hot burning can sometimes make them suitable to blend with lower quality sub-bituminous or lignite coals to improve the overall suitability of the coal. Some bituminous coal is sought domestically for blending.
(iii) Other industrial process, heating and retail coal consumption:
Around 18% of total domestic coal is used in industry, excluding electricity generation, steel and cement manufacturing. A further 3.6% is sold through retail outlets. The largest users of coal outside the electricity generation, steel and cement industries are the dairy, food manufacturing and timber industries. Additionally, coal is used for heating in many hospitals and industrial sites throughout New Zealand. (see paragraph 9.2 for further discussion)
9.1.5 Domestic coal price
Apart from a few large industrial coal users, who require specific coal qualities for their individual industrial processes, most coal users require coal for an energy source or simply for heating. In practice, large industrial users negotiate a contract price for a specific quality and quantity of coal. Industrial users of coking coal typically negotiate a price based on a similar energy content for specific bituminous coal. Domestically supplied bituminous coals are priced lower than international prices because they are generally non- coking bituminous coals and therefore unsuitable for metallurgical use.
The thermal coal market generally views coal as a homogenous product and consequently prices in energy units rather than tonnes. The standard energy measure is Gigajoules (GJ). Coals typically contain 15-30 GJ per tonne. Pricing in Gigajoules enables direct comparisons between different coal types.
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There are three factors that set the price per gigajoule of different coal types apart:
(a) the calorific value of the coal;
(b) any special handling and storage costs at the site; and
(c) transport costs.
According to Solid Energy, the domestic price for thermal coal varies between $[ ] per tonne excluding freight for lignite, and up to $[ ] per tonne excluding freight for sub-bituminous coal. As noted, thermal coals are usually priced on an equivalent energy basis, allowing ready price comparisons across a wide range of coal qualities. While prices on a per tonne basis may differ significantly for different quality coals, prices on a per gigajoule basis are more closely aligned. When costs of storing and handling (including the costs of any specific boiler requirements) the different volumes of coal which may be required to deliver a particular level of energy are taken into account, thermal coals, across the broad range of quality levels, are competitive with one another.
Currently, the international price received at a New Zealand port for thermal coal (bituminous) averages slightly around NZ$[ ] per tonne.
The domestic price for bituminous coal ranges between $[ ] per tonne before freight. In comparison, the internationally equivalent bituminous coking coal price averages around $[ ] per tonne (at a New Zealand port).
Thermal coal is usually priced in terms of its total energy output. The higher the calorific value of the coal, the lower the quantity of coal that will be required to produce a given level of energy. This has important implications for transport costs, as transport costs are calculated in terms of distance travelled, irrespective of the energy content of the coal.
An additional dimension that impacts on the domestic coal price is the degree of competition for the supply of coal. There are currently around 12 coal producers and wholesalers which sell to a variety of customers including both large and small industrial coal users. Solid Energy is the only coal supplier with the production capacity and the coal quality to continuously supply coal of consistent type and specifications and high tonnage to the major coal users like New Zealand Steel Ltd and Genesis.
Several other coal suppliers do have sufficient production capacity to supply large quantities of coal to other users. These suppliers include Cascade Mining Ltd, which supply [ ] of Holcim’s bituminous coal and Glencoal Mining Co Ltd, which along with Solid Energy, supply Genesis’s Huntly power station. McDougall Coal also supply coal to Genesis’s Huntly power station.
Most coal producers are small scale, supplying smaller quantities of coal to the thermal coal market. This competition ensures that prices remain competitive. In addition, all coal suppliers and wholesalers have the productive capacity to increase coal production in response to higher prices or meet additional demand within the thermal coal market.
The following table provides three different transportation scenarios for three different coals located in different parts of the South Island. It is based on a premium sized product namely “pea” grade suitable for small industrial and commercial users.
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[ ]
The table above highlights that the breakeven location for transporting coal within the South Island from West Coast or Southland sources at present price levels based on average transport costs is around Timaru. However, companies which are prepared to adjust prices to overcome additional transport costs can profitably supply throughout the South Island at prices that are above their marginal costs.
[ ], for example, is able to optimise transport costs through efficient use of its own trucking fleets to further reduce transport costs.
9.2 Supply of Coal to South Island Domestic Markets – Further Analysis:
9.2.1 Figures 11 above and 12 below chart the geographic range of competitiveness amongst thermal coal suppliers in the South Island. The figures test the sensitivity when adjustments to the $ value per Gigajoule is varied.
The exercise was undertaken by assigning the most significant thermal coal producers an “ex-mine” expected selling price for this coal.
[ ]
The coal price has been assessed (necessarily with an element of subjective judgment) on the following factors:
(a) Nature of mine e.g. Opencast, stripping ratio etc;
(b) Known “ex-mine” price where available;
(c) Range of products;
(d) Varying customer sizes;
(e) A transport cost of $0.14 per tonne per kilometre (this is a fully costed trucking rate which does not assume any backload benefit);
(f) Trucking has been selected as the transportation mode although in some cases rail transport is possible at a lower cost. However, all mines can access road transport at competitive rates and all do so;
(i) The calculated distances for competitive ranges have been reduced by 20% to approximate for the difference between road distances, and “as the crow flies” distances; and
(ii) The competitive geographic range of coal is sensitive to its energy content. Energy content is based on published data by CRL Energy Limited.
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]
[
]
[
]
The combined effect of “ex-mine” value, energy content and cost per tonne per kilometre allow for the calculation of delivered energy costs.
The above maps show the relative competitiveness of the assessed coals at $3, $4 and $5 per gigajoule (GJ).
At $3 per GJ only three coals have an ex-mine value lower than $3 per GJ. No coals are able to be supplied into Canterbury at that price.
At $4 per GJ, all coal sources are able to enter the market and there is significant scope for competition across Southland, Otago and parts of Canterbury.
At $5 per GJ, there is ample scope for competition in all areas of the geographic market from multiple suppliers.
Prevailing prices of between [ ] per GJ in Canterbury make strong competition from competing suppliers a reality.
Code to interpreting Figures 12a, b and c
Region Supplier Colour
Buller Eastern - Cascade Yellow
Reefton Giles Creek Green
Imports Ex-Timaru Unspecified Red
Otago Kai Point Coal Mauve
Eastern Southland New Vale Yellow
Western Southland Eastern – Straith Blue
Greymouth suppliers have not been included due to current production interruptions and uncertainty as to whether those suppliers will re-enter the market. If they were to re-enter they are competitively well placed with regard to supply into Canterbury.
IDENTIFICATION OF MARKETS AFFECTED
Horizontal Aggregation
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10. Are there any markets in which there would be an aggregation of business activities as a result of the proposed acquisition?
10.1 In the event of the proposed acquisition we have concluded that there is only one relevant market which has the following dimensions:
10.1.1 product dimensions: lignite and sub bituminous thermal coal market, including bituminous coal for blending with thermal coal;
10.1.2 geographic dimension: the southern half of the South Island (including South Canterbury); and
10.1.3 functional dimension: mining and distribution of lignite and sub bituminous coal and bituminous coal for blending.
10.2 The Newvale mine is operated predominantly [ ] Newvale produces approximately [ ] tonnes of lignite per annum of which approximately [ ] tonnes is supplied to [ ]. The balance of production is supplied amongst a variety of industrial and domestic users throughout the lower half of the South Island.
The approximate regional spread of sales for Newvale are:
[
]
Of the sales in Southland, [ ] accounts for [ ] tonnes. Additionally, we understand [
]
10.3 The proposed acquisition will result in horizontal aggregation in the mining and distribution of thermal coal in New Zealand on the basis that coal from the Newvale mine is sold into the domestic market. Although Newvale does not supply coal into the South Canterbury region (its northern bound coal largely going to Christchurch) we consider South Canterbury to be included in the geographic market because [
] This demonstrates along with Newvale supplying into Christchurch that the geographic market should encompass South Canterbury. The presence of Kai Point, Giles Creek, Kenroll and possible Strait mine (in the future) in South Canterbury are sources of supply which could supply should the merged entity raise prices. We also refer to the pricing analysis undertaken at paragraph 9.2 above. [ ]
10.4 At paragraphs 17 and 19 we advance the view that other forms of energy although not supplied in the same market do compete with thermal coal to some extent and should be regarded as potential substitutes. This competition in our view is growing. The evidence of customers moving to alternative energy sources and outlined in paragraph 13.29 support the contention that other forms of energy are close substitutes to thermal coal in the eyes of coal purchasers, particularly for purchasers who have boiler plants set up to burn lignite.
10.5 We note that the Commission did not conclusively determine this point in its Decision 397, preferring to take a conservative view in the absence of compelling evidence. We consider that market conditions have changed since Decision 397. We believe that NZ is moving toward a single thermal energy market with costs of different modes moving into alignment when fully costed (ie including total cost of equipment, operational and R & M costs and fuel costs are taken into account).
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A smaller user requiring hot water for process use or heating could have:
10.5.1 High capex, very efficient, heatpump based system using relatively expensive electricity efficiently;
10.5.2 Low capex, high fuel cost LPG based system;
10.5.3 Mid capex, mid fuel cost diesel fired system;
10.5.4 High capex, low fuel cost coal based system with high maintenance, ash disposal costs etc;
10.5.5 High capex, low fuel cost woodwaste based system with high maintenance, ash disposal costs etc.
For smaller users these are all competing viable options.
At present for larger users the low fuel cost for coal tends to prove the lowest overall cost option although the examples of customers lost by Solid Energy in Canterbury to electricity and LPG as quoted in clause 13.29 show that real competition exists. In the North Island reticulated natural gas has taken a substantial share of the industrial thermal energy market from coal over the last 25 years and a single thermal energy market is almost certainly a reality there.
While it may be premature to conclude there is a single thermal energy market in the South Island, we believe the Commission should place some weight on this to the extent it does exist already and the trend towards it.
VERTICAL INTEGRATION
11. Will the proposal result in vertical integration between firms involved at different functional levels?
11.1 The proposed acquisition will not result in any vertical integration occurring between functional levels.
12. In respect of each market identified in questions 10 and/or 11 identify briefly details of proposed acquisitions notified to the Commission, the outcome of the notification, whether the acquisition occurred and any other acquisitions undertaken in the last three years.
SOLID ENERGY
12.1 Neither Solid Energy nor the vendors of Newvale have notified any proposed acquisitions to the Commission in the past three years. The last acquisition notified to the Commission by Solid Energy was that of the shares of Todd Coal Limited (Todd Coal) in various mining interests related to the Spring Creek Mine which was given clearance on 28 June 2001 (Decision 432).
12.2 Specifically the Commission gave clearance for the acquisition by Solid Energy of:
12.2.1 Todd Coal’s interest in the Greymouth Coal unincorporated joint venture (including the issued share capital in cash of Greymouth Coal Limited and Greymouth Coal Operating Limited held by Todd Coal);
12.2.2 Todd Coal’s interest in the Upper Waimangaroa unincorporated joint venture;
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12.2.3 The assignment of Todd Coal’s interest in the coal supply agreement with Golden Bay Cement; and
12.2.4 Todd Coal’s interest in the Moody Creek Mine.
12.3 On 4 August 2000 the Commission also gave Solid Energy clearance to acquire the domestic retail customer base of Francis Mining Limited (Decision 397).
12.4 Solid Energy has not been involved in any acquisition in the last three years which has Commerce Act significance.
VENDORS
12.5 None.
CONSTRAINTS ON MARKET POWER BY EXISTING COMPETITION
13. Who are the suppliers of competitive goods or services – including imports and what are their estimated shares of productive capacity and of the market?
13.1 It is acknowledged that for the purpose of considering the application the Commission will take the view that a “lessening of competition” and “strengthening of market power” are equivalent and the terms are used by the Commission interchangeably. This information on existing competition in the market and market shares held by those competitors is relevant and is provided below and earlier in this application.
13.2 According to the Ministry of Economic Development, coal produced in New Zealand comprises 49% high quality bituminous coal, 46% sub-bituminous coal and the remaining 5% lignite.
13.3 The Newvale mine produces lignite.
13.4 According to the Coal Association of New Zealand’s 1999 report on industrial coals, there were 23 registered mining companies with licences to operate 46 mining sites throughout New Zealand. Twenty six of these sites produced quantities of coal in excess of 10,000 tonnes. Six sites were responsible for 77% of New Zealand’s 1998 coal production.
13.5 Newvale produces approximately 5.7% of coal supplied to the domestic market.
13.6 Most coal suppliers have sufficient production capacity to supply larger quantities of coal. At present many coal producers are small scale operations supplying smaller quantities of lignite and sub-bituminous coal. The market for lignite and sub- bituminous coal is the most competitive of all of the markets for grades of coal in New Zealand.
13.7 All of the suppliers of lignite and sub-bituminous coal in the market have the potential to increase production in response to any attempt by Solid Energy to restrict supply and increase the domestic price of thermal coal. Accordingly there is no significant barrier to increasing production nor does there appear to be significant barriers to entry given the low costs of establishing an opencast mine (see Fig 7). Additionally, given that approximately 83% of coal reserves in New Zealand are lignite which are concentrated in Southland and Central Otago, access to reserves would be relatively easy (see further discussions on L & M Mining at paragraph 13.17 et seq). This point was acknowledged by the Commission in Decision No. 397.
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13.8 An important factor in the ability of coal producers to increase production is the type of mine that is in operation. It is relatively inexpensive to expand production with an opencast mine due to low capital costs and most costs are variable with production, providing good flexibility. Most lignite and sub-bituminous coal is mined in open cast mines. Lignite, such as Newvale’s coal, is typically a “shallow” coal with little soil cover therefore both the production costs and initial investment to extract lignite are low. Also, the shallow nature means mines are relatively small, easy to rehabilitate and therefore the easiest of mines to obtain RMA consents for.
13.9 Cascade mine (now owned by Eastern) has traditionally produced around 40,000 tonnes of sub-bituminous coal per annum. We understand that, under the new ownership of Eastern, production has ramped up to 100,000 tonnes per annum. Similarly, Straith mine, acquired by Eastern in September 2006, has historically produced around 20,000 tonnes per annum (with less production in the last two years) but is set to gear up to produce approximately 100,000 tonnes per annum (source: ASX announcement by Eastern Corporation, September 2006). As these examples show, ramping up production is readily obtainable over a short time frame provided the owner has sufficient financial resources to meet the cost of doing so. Arguably the capital costs are largely dictated by the existing plant on site. This in part explains why many of the smaller mine operations are relatively low producers. It is Solid Energy’s experience and view that little capital investment is occurring with these smaller mines and many are using old and outdated plant. An injection of capital would be all that is required for production to increase given that most thermal coal lies reasonably close to the surface of the ground and most opencast mines have significant in ground reserves. Giles Creek is an example of a smaller mine that has ramped up production as a consequence of capital being contributed. Historically Giles Creek has produced annual volumes of between 20-30,000 tonnes of thermal coal. In 2005 it acquired a wash plant from Australia and as consequence Giles Creek has the capacity to produce 200,000 tonnes of coal annually.
IMPORTED COAL
13.10 The importation of coal also exists to maintain competition. The importation of sub- bituminous coal from Australia and Indonesia provides an effective constraint on pricing by New Zealand coal producers. Coal is presently being imported into New Zealand via three North Island ports by Genesis and New Zealand Steel Ltd (on a trial basis with coal imported by Genesis), McDonalds Lime and Golden Bay Cement. For the period June 2003 to July 2006 approximately 2.827 million tonnes of thermal coal was imported into the North Island. [ ] The importation of coal into the South Island through the major ports is technically and economically feasible. Solid Energy and at least two other major coal consumers have considered this option. Importing into the South Island has not yet occurred because Solid Energy believes that customers prefer the simplicity and security of supply from local sources to be preferable unless there is a clear price advantage from imports.
Coal imports by Genesis have a landed cost (FOB price plus ocean freight) of an average of [ ] per GJ (2006 ytd) allowing for port charges and storage and handling, imports are competitive at [ ] per GJ in the vicinity of the major South Island ports.
[
]
(Source: Customs Statistics)
SUPPLIER OF COMPETITIVE GOODS
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EASTERN CORPORATION LIMITED
13.11 The recent arrival of Australian listed company Eastern in the South Island coal market is a further credible competitor to Solid Energy. In 2005 Eastern acquired the assets and business of Cascade mine. Cascade mine is located in the Buller district and is operated as an opencast mine producing high energy bituminous coal. Cascade coal is presently sold domestically. Cascade produced 49,193 tonnes for the year ended 31 March 2006 and have announced plans to increase output to 100,000 tonnes.
13.12 On 5 September 2006 Eastern announced, via the Australian Stock Exchange, that it had acquired the coal mining operations of Straith Industries at Ohai. Eastern also acquired the Timaru Fuel Centre which will be used as a coal stockpile and blending distribution facility centrally located between the Straith and Cascade mines.
13.13 The ASX announcement clearly indicates Eastern’s intention to expand into the South Island thermal coal market. Discussing the Straith acquisition, Eastern’s CEO said,
“The acquisition is an important step in Eastern’s strategy of expansion in New Zealand. It is Eastern’s intention to build a robust, self-sufficient mining operation which will generate cashflow to fund the company in the development of its current projects and pursuit of new opportunities.”
The full text of the ASX announcement is attached at Appendix E.
Eastern advises that it is planning to have the Straith mines produce 100,000 tonnes of coal annually (from a total in-ground resource of 2.85 million tonnes). Further, Eastern has also applied for prospecting permits over adjacent land leading to a potential to increase tonnages through further exploration.
13.14 Clearly, the intention and plans of Eastern are to gear up to be a significant competitor to Solid Energy in the Otago/Southland, South Canterbury and West Coast regions. We understand from the ASX announcement that Eastern has the capital resources to implement its intentions, has ordered plant from suppliers and will start operations in October 2006. [ ]
13.15 Further details in the ASX announcement note that their Ohai resources have attractive geological and mining characteristics. The quoted downhole ratio of less than 5:1 is more favourable than Solid Energy’s existing Ohai mine. This strongly implies their operation will be more competitive against Solid Energy owned Newvale than Solid Energy Ohai is against Newvale at present.
13.16 Further information on eastern can be found at www.easterncorp.com.au.
L & M MINING LIMITED
13.17 Although not yet a miner or distributor of thermal coal L & M Mining Limited (L & M) has publicly discussed its plans to enter the business of coalbed methane production and the mining and distribution of thermal coal including large scale development of lignite resources in Otago and Southland. [Source: Paper to Australasian Institute of Mining and Metallurgy, 2002]
13.18 Evidencing these intentions L & M, through itself and associated companies, has acquired a number of parcels of land in the Southland and Otago regions. A search of the relevant land registries reveals that L & M and associated companies own 12,073 hectares of land in the Otago and Southland regions.
13.19 L & M Coal Limited has five exploration permits and applications covering 272 square kilometres in Buller, Kaitangata and Ohai in the South Island and Maramarua and
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Whangamarino in the North island. L & M Southland Lignite Limited also has four exploration permits over significant land areas in Southland (approximately 9,578 hectares). The same company also holds an exploration permit over 8,690 hectares in Central Otago. As discussed at paragraph 13.29 it is not possible to identify what if any, private coal rights the L & M group of companies hold. L & M on its website (www.lmgroup.net.nz] comments that it has identified resources of 125 million tonnes of coal. Recent events, such as the run off of gas production has reopened opportunities for commercial development of coal in New Zealand and L & M indicated that it wishes to pursue these opportunities.
13.20 At Kaitangata, L & M is well advanced in its evaluation in establishing an opencast mine accessing 10 million tonnes of lignite to sub-bituminous coal. A similar evaluation is being undertaken at Ohai (source: www.lmgroup.net.nz).
KAI POINT COAL LIMITED
13.21 The Kai Point opencast mine has been operating since 1958 and produces approximately 55,000 tonnes of lignite/sub-bituminous coal (typically with a gross calorific value of 19.67 Mj/kg) of which 80% is supplied to industrial consumers and the balance to the domestic household.
13.22 Coal from Kai Point is sold in the Balclutha-Dunedin area but some sales occur in Invercargill and Christchurch. Coal is also blended in Kai Point’s subsidiary’s premises in Dunedin.
13.23 Further information on Kai Point is available at www.kaipointcoal.co.nz.
GILES CREEK
13.24 Birchfield Coal Mines Limited is the owner of the Giles Creek mine located in Reefton, West Coast. The coal is sub-bituminous (with a typical calorific value of 19.50 Mj/kg) and is supplied to meat and wool processing, rubber and service industries throughout Canterbury (and South), the West Coast, Nelson and smaller amounts to Otago/Southland.
HEAPHY MINE
13.25 The principal market for Heaphy is the supply of sub-bituminous coal into the Nelson region. Current production is understood to be approximately 20,000 tonnes per annum.
KENROLL (CANTERBURY COAL LIMITED)
13.26 The main customer for Kenroll is the Christchurch hospital which takes around 70% of Kenroll’s 20,000 tonne annual production. The coal produced is sub-bituminous.
[
]
[
]
These numbers are taken from Solid Energy’s market database. It fully states Solid Energy’s sales but underestimates competition sales as not all are known.
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13.27 As discussed above horizontal aggregation will only occur in Otago, Southland and South Canterbury. However, if one were to acknowledge the acquisition of Straith mine and Cascade by Eastern and [ ] the acquisition of Newvale mine by Solid Energy will act to constrain Eastern in the relevant market. We say this because if Solid Energy’s acquisition of Newvale does not proceed and Eastern is the ultimate acquirer of Newvale there is likely to be no real substantial competitor to Eastern unless parties such as L & M enter the market or [ ] opens a new mine.
13.28 Competition in the market is active. In the last 18-24 months Newvale was outbid by Harliwich Roxborough Coal for the coal supply of [ ] tonnes per annum to the Central Otago District Council (Cromwell Swim centre). Kai Point has captured increased market share into the bagged and general household market in Gore and Invercargill. This has eroded both Solid Energy’s and Newvale’s share of this market. Kai Point also outbid Newvale for the coal supply contract with City Forests, Milburn. The supply is for [ ] tonnes of lignite. [
] Additionally both Fonterra’s Clandeboye Plant and Dunedin hospital have recently successfully trialled Newvale lignite. Both Clandeboye and Dunedin hospital presently use Ohai coal.
Other examples of movement in the market (from higher to lower energy coal) are:
13.28.1 PPCS Waitane have moved from a 24GJ coal to a 19GJ coal (approximately a 1500 tonne annual supply);
13.28.2 Southtile Limited have moved from 100% supply of Ohai coal to 50% Ohai and 50% Newvale coal (approximately 3000 tonne annual supply); and
13.28.3 Kew hospital (Invercargill) sourced Ohai coal up to last winter but this year have exclusively used Newvale coal (approximately 1000 tonne annual supply).
13.29 Permit applications in New Zealand are increasing as indicated in the below table. Arguably the increase in applications demonstrates the increased focus on coal mining as a profitable economic activity attracting renewed interest.
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Figure 14: Permit Applications
It must be noted that a review of permits/licences granted by the Crown only reveals part of the exploration and mining activity in New Zealand in relation to lignite coal. Unlike other minerals, such as gold, coal can be owned by the Crown or privately in New Zealand. The vast majority of lignites are privately owned and therefore outside of the permit regime of the Crown Minerals Act – which relates only to minerals owned by the Crown. Accordingly, the permits/licences granted can provide no guide as to whether or not privately owned lignites are being or likely to be accessed.
13.30 In addition to competition from coal producers, Solid Energy also faces constraints from other energy sources. Whilst the degree of constraint from other energy sources varies by location and application, for many heating applications gas, oil or electricity represent a realistic alternative to coal. In regard to electricity generation for example, gas and coal are rival fuel uses at the Huntly power station, and electricity generated by other means (e.g. hydroelectric) is a low cost competitor to both.
13.31 See also paragraphs 16 and 17 below.
14. Identify any links, formal or informal, between any participant/s including interconnected bodies corporate and other persons identified at paragraph 5 and its/their existing competitors in each market
14.1 Other than the proposed acquisition there are no links between Solid Energy and Newvale and/or its shareholders.
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14.2 Solid Energy has links with Francis Mining by virtue of the sale and purchase of coal agreements which was given clearance by the Commission on 4 August 2002 in Decision 397.
15. Do any directors of the “acquirer” also hold directorships in any other companies which are involved in the markets in which the “target company/business” operates?
15.1 No.
16. To what extent do you consider that the merged entity would be constrained in its actions by the conduct of existing competitors in the markets affected?
16.1 The primary constraints in respect of coal produced from the Newvale mine are the [
] the acquired entity would be highly constrained in its actions and the acquisition will give it no greater market power.
16.2 Following implementation of the proposed acquisition, Solid Energy will also continue to have considerable constraints on any attempted exercise of market power in the markets affected from those competitors discussed at paragraph 13 above.
16.3 Alternative suppliers in the domestic market and the potential viability of importing coal would preclude Solid Energy’s acquisition of Newvale resulting in a substantial lessening of competition. There are a number of producers of lignite and sub- bituminous coal who could increase production with little difficulty in the event that Solid Energy attempted to impose a small yet significant and non-transitory increase in price.
PART II: CONSTRAINTS ON MARKET POWER BY POTENTIAL COMPETITION
POTENTIAL SUBSTITUTES
17. Please list goods/services, if any, the purchaser could buy as potential substitutes and set out who supplies the potential substitutes and who owns the suppliers
17.1 LPG gas, fuel, oil and diesel, waste oil, wood (being wood, wood waste or wood pellets) and electricity are potential substitutes for coal as an energy source. For many heating applications, electricity and gas represent alternative energy sources to coal. Oil, waste oil and wood are also seen as alternative energy sources. Electricity suppliers are significant suppliers to the industrial processing, dairy, meat, health, timber processing, paper and horticultural industries. Electricity suppliers already market actively to industrial coal users and if the price for coal increased significantly coal customers could rapidly substitute their energy supply with electricity.
17.2 [ ]
17.2.1 [ ]
17.2.2 [ ]
17.2.3 [ ]
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17.2.4 [ ]
In respect of Solid Energy:
17.2.5 Chargeurs Wool – conversion to diesel;
17.2.6 Waikari Hospital – conversion to LPG;
17.2.7 Christchurch City Council – conversion to LPG;
17.2.8 Several schools and businesses requiring commercial heating – conversion to electricity;
17.2.9 Solid Energy’s wholly owned subsidiary, Natures Flame Limited is shortly to install a woodwaste fired boiler for Radford Yarn Technologies, Christchurch which is to replace an existing electric boiler.
Woodpellet burners are also becoming popular as a form of domestic heating.
17.3 The substitutability of electricity for coal-based energy is affirmed by announcements by other electricity generators/suppliers, including Meridian, Genesis, Contact, Trustpower and others. All these generators propose to increase generation capacity, even though New Zealand’s electricity supply and demand is approximately in balance, since they perceive that if they are able to increase generation with a broader and lower cost base they will be able to increase market share in supply. Solid Energy considers supply of low cost electricity from Meridian to be a direct competitor to supply of coal to the industrial market in Southland, Otago and Canterbury.
18. Identify any links, formal or informal, between the participants in this proposal and suppliers of potential substitute in each market
18.1 None.
19. To what extent do you consider that the merged entity would be constrained in its actions by the presence of suppliers of potential substitutes in the markets affected?
19.1 Whilst it has previously been considered to be open to argument whether substitutability across products and relevant chains of supply exist in respect of coal, Solid Energy’s experience is that alternative energy forms are already direct competitors. It is clear New Zealand’s energy supply and demand will alter even more towards ready substitutability in the future. In “Energy Outlook to 2020” published by the Ministry of Commerce in February 2001 it is stated:
19.1.1 “The composition of New Zealand’s energy supply and demand balance is projected to alter significantly over the next 20 years, as demand growth is met, and as:
(a) The relative rates for fuels change;
(b) The Maui gas field depletes;
(c) The diversity of new electricity generation projects increases; and
(d) Climate change issues impact on energy use.”
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19.2 It is submitted that competition amongst different energy providers is strong already, and becoming even more significant in future.
CONDITIONS OF EXPANSION/ENTRY
20. The following categories cover different types of entry conditions:
20.1 Frontier entry conditions: In this regard, we refer the Commission to the material that can be accessed at www.med.govt.nz/crown-minerals/minerals/html. The “Legislation and Application forms” section describes the regime for regulating prospecting and exploration for and production of coal in New Zealand in accordance with the Crown Minerals Act 1991 and the Crown Minerals (Minerals and Coal) Regulations 1999, including:
20.1.1 setting out the types of permits available and the process for applying for such permits;
20.1.2 specifying permit holders rights and obligations; and
20.1.3 identifying other relevant legislation such as Health and Safety in Employment Act and Resource Management Act requirements.
In addition to the regulatory regime relating to Crown owned minerals, the barriers to accessing privately owned coal are considerably lower. All that is necessary is for a prospective miner to “do a deal” with the owner of the land and minerals. No permits or access arrangements are required. RMA and other relevant legislation will apply.
20.2 Legislative/regulatory conditions: See paragraph 20.1 above.
20.3 Industrial/business: The skills and technology to mine, market and distribute coal are readily available. Coal is not a scarce resource (there being an estimated 9 billion tonnes of available coal reserves) and in Southland, in particular, there are a number of sites that would be available to a new entrant into the market place.
The costs of purchasing the relevant sites and obtaining the relevant resource consents and mining permits would not provide a significant barrier to a party wishing to enter the market place or expand. Examples of new entrants include:
20.3.1 the recent establishment of the Pike River mine by New Zealand Oil and Gas;
20.3.2 the recent opening of a new mine at Malvern by Canterbury Coal Limited;
20.3.3 Rangatira Developments’ proposal to establish an opencast mine in the Mount William range near Westport;
20.3.4 Francis Mining’s recently re-opened Roa mine and its extensions;
20.3.5 L & M’s land acquisition in Southland/Otago, its applications for exploration permits and its stated intention to enter the lignite/sub-bituminous coal market;
20.3.6 Eastern’s acquisition of the Cascade and Straith mines along with the Timaru depot for stockpiling and blending; and
20.3.7 the acquisition of the Tiller mine near Greymouth by private interests who plan to significantly increase production.
20.4 Other:
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Which, if any, of the entry conditions identified above do you consider could be likely to act as a “barrier” to expansion by existing competitors or entry of new competitors in response to a specific non-trivial and sustained action by the merger firm relating to price, service or product quality?
20.4.1 The ability to increase supplies of domestic lignite is constrained by several factors including:
(a) No constraints have been identified other than the aspirations of smaller family owned businesses.
(b) Consolidation is occurring e.g. Eastern (Straith, Cascade and we understand Heaphy all being purchased). The greater scale and access to capital is likely to increase the competitive power of these operations.
Would any of the entry conditions (identified above) affect potential competitors trying to enter the market differently from the way they affected existing competitors when they entered the market?
20.4.2 No.
21. Please name any businesses which already supply the market – including overseas firms – which you consider could increase supply of the products/services concerned in the geographic market identified by:
21.1 Diverting production: See paragraphs 13.10 to 13.26 above. Australian and Indonesian supplies strip several hundred million tonnes per annum of thermal coal to export customers which could be purchased by NZ users.
21.2 Increasing utilisation of existing capacity: See paragraphs 13.6 to 13.26 above. Any of the current coal producers could increase utilisation of existing capacity.
21.3 Expansion of existing capacity: It is feasible that any of the coal producers in the relevant market would increase domestic supplies in response to greater demand or an increase in domestic thermal coal prices. The Commission’s Decision No. 397 recognises this fact. Additionally, should domestic thermal coal price increase, the possibility of imported thermal coal entering the domestic market becomes more likely, noting that thermal coal is sold on an energy basis and therefore higher calorific value coal could be blended with lower value coal to meet the energy requirements of industrial users.
22. What conditions of entry do you consider would influence the business decision to increase supply in each case?
22.1 Additional production and/or new entry would be triggered by any attempts by Solid Energy to restrict supply and/or increase prices.
23. How long would you expect it to take to increase in each case?
23.1 Additional production from open cast mines could occur swiftly through the introduction of additional plant or multishifting existing plant. In fact, at similar or lower marginal cost (see 13.7 above) additional supply could occur within a few months which is quicker than the duration of typical supply contracts.
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24. In your opinion, to what extent would the possible competitive response of existing suppliers constrain the merged entity?
24.1 Most coal producers and suppliers have sufficient production capacity to supply larger quantities of coal and to “ramp up” production should demand require and particularly if Solid Energy sought to restrict supply and increase the domestic coal price.
CONSTRAINTS ON MARKET POWER BY THE CONDUCT OF SUPPLIERS
25. Who would be the supplier of goods or services to the merged entity in each market identified in questions 10 and/or 11?
25.1 The relevance of suppliers is not considered significant to the analysis in this application.
CONSTRAINTS ON MARKET POWER BY THE CONDUCT OF ACQUIRERS
26. Who would be the acquirers of goods or services by the merged entity?
26.1 The volume of coal required by large customers provide them with a strong bargaining position given Solid Energy would be unable to maintain production levels were these customers to cease purchasing coal from Solid Energy.
26.2 This would not be changed by the acquisition of Newvale. In particular, [
]
26.3 Fonterra operates coal activities in the North Island through its subsidiary company Glencoal Energy Limited. It is feasible for Fonterra to bring its mining expertise into the South Island and commence mining operations. Glencoal Energy Ltd holds a coal prospecting permit (39-299) for coal near Ranfurly in the South Island.
26.4 [
]
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This application is made on behalf of Solid Energy New Zealand Limited. I, Warren John Maslin, Chief Financial Officer, am authorised to make this application on behalf of Solid Energy New Zealand Limited and I hereby confirm to the best of my belief:
• all information specified by the Commission has been supplied;
• all information known to the applicant which is relevant to the consideration and determination of this application has been supplied; and
• all information supplied is correct as at the date of this application.
I undertake to immediately advise the Commission of any material change in circumstances to the application.
DATED this day of 2006
______
Warren Maslin
Chief Financial Officer
Solid Energy New Zealand Limited
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Appendix A
Sale and Purchase Agreement
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Appendix B 40
Solid Energy – Interconnected/Associated Companies
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Appendix C
Solid Energy’s Interim Report for the six months ending 31 December 2005
Appendix D
Solid Energy’s Statement of Corporate Intent
Appendix E
ASX Announcement – Eastern Corporation
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2005 2006 FOR THE SIX MONTHS ENDED 31 DECEMBER 2005 INTERIM REPORT Solid Energy New Zealand Limited and Group Report for the Six Months Ended 31 December 2005
Solid Energy produced a net surplus after tax of $38 million that were more than 150% up on the previous year in the for the six months ended 31 December 2005, more than same period. double the surplus for the same period last year (2004: New Zealand sales were down 13% to 1.03 mt (2004: $17.5 million). The record half-year result was due primarily 1.18 mt) as our industrial customers had to source coal to exceptional export prices which offset the continuing high supply from alternative suppliers during the July industrial New Zealand dollar in the period. action. While overall production volumes were down, due to 17 Sales to New Zealand Steel and Genesis Energy continue days of industrial action at the beginning of July, revenue to dominate New Zealand sales, but demand remained for the period was a record $257.1 million, 41% up on last strong across all industrial sectors. A warmer winter, coupled year (2004: $182.6 million). Total sales volumes reached with our announcement that the company will progressively 2.18 million tonnes (mt) (2004: 2.24 mt) in the six months. withdraw from the household coal market over the next few Exports increased to 1.15 mt, fractionally above last year years, resulted, as expected, in reduced bagged coal sales (2004: 1.06 mt), but down against forecast by 40,000 tonnes during the period. due to the July industrial action. The production shutdown The company’s financial position that had been due to industrial action meant that Solid Energy was not weakened by the large asset write-downs in June 2005 has able to take full advantage of the exceptional export prices been significantly improved by the strong half-year result. Solid Energy New Zealand Ltd and Group 2005 01 Terrace Ohai Opencast (Waikato) and (Waikato) , along with , along with , continues to experience strong , continues to experience Mines Huntly East Huntly East (Reefton) Nature’s Flame , (Southland) fell short of forecast. , (Southland) Rail network owners, On Track, are making good progress Rail network owners, On new Longer term, proving resources and developing Our pellet fuel business, Solid Energy Renewable Fuels, business, Solid Energy Our pellet fuel Production at Production growth in both appliance and fuel sales. A new pellet growth in both appliance in Rotorua at the end of 2005 production mill was opened and industrial markets in the to supply both residential North Island. Line, the company’s export rail in upgrading the Midland Coast and Lyttelton. Rail operators, link between the West delivering new wagons, increasing Toll Rail, are progressively to seven 24 and 30-wagon trains capacity on the line. Up truck now running on the line. We still need to a day are capacity coal from Stockton to Reefton to deliver increased The new to meet demand from international customers. the Grey Solid Energy financed Cobden Rail Bridge across River is on schedule for completion mid 2006. Future Outlook Zealand and Demand for Solid Energy coal within New outlook for internationally remains strong. The short term international the company is positive on the back of good prices will coal prices for hard coking coal. International up to 30% for weaken in the coming year, with falls of negotiations thermal coal already signalled in current steelmakers. between Australian producers and Asian our major mines to meet customer demand remains of mining in challenge, together with the rising cost competitors. New Zealand relative to large international Underground Mine trading as 6 Months to 6 Months to 12 Months to , 31 December 2005 31 December 2004 30 June 2005 Stockton Rotowaro Cypress Opencast Spring Creek Underground Mine , Waikato, is now largely complete with the in the Buller, again exceeded 1 mt in the six again exceeded in the Buller, in the Buller were upheld by the Environment Court in the Buller were upheld by the Environment Development of the new Awaroa 4 pit at Development of the new Awaroa 4 pit at Coal extraction at Resource consents for the planned Resource consents for Onerous Contract Provisions and Taxation Contract Provisions Onerous $56.5 M $26.1 M $54.9 M ExportsNew Zealand 1.03 M 1.15 M 1.18 M 1.06 M 2.28 M 2.18 M near Greymouth, recommenced in August with 0.215 mt near Greymouth, recommenced in August mine plan for produced for the half year. A 12-month 2007 is development and extraction through to February the long- currently being implemented; we are assessing and expect term viability of extending the mine to the west to proceed to make a decision in April 2006 on whether of 2007. with a further five-year plan from the beginning Mine by Forest in June 2005. The High Court rejected an appeal 2005. and Bird and Buller Conservation Group in December later in 2006. Development of the mine is expected to start Opencast Mine to transfer the first coal in production. We recently agreed extraction at contract for overburden stripping and coal Pty Limited Rotowaro to a subsidiary of Leighton Contractors Zealand mining which has bought the Australian and New had been business of Henry Walker Eltin Pty Ltd. HWE 2005. placed in voluntary administration in January Earnings before Interest and TaxationSurplus after TaxationDividend PaidReturn on Shareholders Funds (annualised)Return on Average Assets (annualised) $57.4 M 40.71% $26.3 M 23.05% $38.0 M 20.5% $9.6 M 12.9% $17.5 M 3.87% - 2.2% $6.3 M - - Sales Turnover Impairment Write-downs, Operating Surplus before $257.1 M $182.6M $400.8 M I I Performance Highlights – unaudited Opencast annual carrying capacity to the upgrade in the months, due from 2.0 to 2.3 mt, completed in mid of the aerial ropeway, work for mining high value 2005. We started preparatory ridgeline in October following coking coal on the Stockton and confirmation of the technical extensive consultation area safely, while minimising any solutions for mining the licence. We have applied for a impact outside the mining by hand and direct transfer, before wildlife permit to relocate found on the Mt Augustus area mining commences, snails of the ridgeline. Operations export mine, at our main Coal production Tonnes of Coal sold – total 2.18 M 2.24 M 4.46 M 38,008 17,477 6,364 $’000 $’000 $’000 $’000 $’000 $’000 6 months to 6 Months to 12 Months to 31 December 2005 31 December 2004 30 June 2005 31 December 2005 December 2004 31 30 June 2005 Notes 6 Months to 6 Months to 12 Months to 205,713 178,818 167,705 For the six months ended 31 December 2005 – unaudited For the six months ended 31 December 2005 – unaudited 31 December six months ended For the The accompanying notes form an integral part of these financial statements. Consolidated Statement of Movements in Equity Consolidated Statement of Movements The accompanying notes form an integral part of these financial statements. The accompanying notes form an integral part Consolidated Statement of Financial Performance of Financial Statement Consolidated Total operating revenue taxationOperating surplus before Income tax Operating surplusMinority interestsNET SURPLUS 3 56,495 257,077 4 26,114 182,647 38,008 (18,487) 8,901 400,871 - 17,477 (8,637) (2,537) 6,364 - - Equity at the beginning of the periodTotal recognised revenues and expenses Net surplus for the yearEQUITY AT THE END OF THE PERIOD 167,705 161,341 38,008 161,341 17,477 6,364
Solid Energy New Zealand Ltd and Group 2005 02 Solid Energy New Zealand Ltd and Group 2005 03 79,434 66,578 92,805 As at As at As at $’000 $’000 $’000 31 December 2005 31 December 2004 30 June 2005 As at 31 December 2005 – unaudited December 2005 As at 31 TOTAL ASSETS 343,398 287,401 316,085 CURRENT ASSETS Cash at bankShort-term depositsShort-term Crown ReceivableAccounts receivableInventoriesStripping in advanceTOTAL CURRENT ASSETS 1,128 15,070 1,981 49,715 132,723 1,250 39,855 12,844 24,974 104,796 44,659 436 1,128 23,806 11,788 120,684 21,801 53,806 1,599 34,982 17,381 NON-CURRENT ASSETS Property, plant and equipmentMining propertiesCrown receivableInvestmentsGoodwillTerm portion of prepaymentsDeferred taxationTOTAL NON-CURRENT ASSETS 103,904 75,506 51,682 210,675 11,409 18,530 94,612 6,474 74,109 182,605 18,376 8,667 16,723 300 195,401 4,010 49,199 12,125 16,478 3,160 430 4,017 18,610 360 TOTAL EQUITY AND LIABILITIES 343,398 287,401 316,085 CURRENT LIABILITIES Accounts payable & accrualsProvisionsLoansCompany tax payable 36,889 35,569 2,327 9,218 31,000 34,196 1,181 4,828 25,000 6,391 9,218 43,000 NON-CURRENT LIABILITIES Term ProvisionsTOTAL NON-CURRENT LIABILITIES 58,251 42,005 58,251 55,575 42,005 55,575 EQUITY Share capitalReservesShareholders’ interestMinority shareholders’ interestTOTAL EQUITY 205,708 5 60,900 144,808 205,713 178,814 60,900 117,914 4 178,818 167,700 60,900 106,800 167,705 5 The accompanying notes form an integral part of these financial statements. Consolidated Statement of Financial Position of Financial Statement Consolidated 150 58 1,576 (28,275) (28,374) (72,151) 262,866 176,307 381,613 (219,077) (165,279) (346,219) $’000 $’000 $’000 31 December 2005 2004 31 December 30 June 2005 Notes 6 Months to 6 Months to 12 Months to For the six months ended 31 December 2005 – unaudited 31 December six months ended For the Cash was applied to : Purchase of property, plant and equipmentInvestment in mining propertiesInvestment in other non-current assetsNET CASH FLOWS FROM INVESTING ACTIVITIES (2,457) (5,786) (703) (17,738) (20,032) (3,488) (13,303) (9,933) (28,125) (55,360) (28,316) (70,575) Cash flows from operating activities Cash flows from operating Cash was provided from: CustomersGST receivedInterest on short-term depositsNET CASH FLOWS FROM OPERATING ACTIVITIESCash flows from investing activities 690Cash was provided from : Proceeds from sale of property, 250,241plant & equipment 11,935 543 169,162 6,602 12 365,567 970 15,076 43,789 11,028 150 35,394 58 1,576 Cash was applied to: Payments to suppliers, employeesTax paidInterest on short-term borrowingsInterest on long-term borrowings (195,175) (1,585) (159,093) - (334,968) (698) (22,317) (48) (1,670) (5,440) - (9,581) Consolidated Statement of Cash Flows Statement Consolidated
Solid Energy New Zealand Ltd and Group 2005 04 Solid Energy New Zealand Ltd and Group 2005 05 ------$’000 $’000 $’000 31 Dec 2005Dec 2004 31 30 June 2005 Notes to 6 Months 6 Months to Months to 12 For the six months ended 31 December 2005 – unaudited 31 December six months ended For the Cash balances in statement of financial position Cash at bankLiquid portion of short-term depositsShort-term loansEnding cash carried forward 15,070 (13,949) 12,844 1,981 (31,000) (11,720) 11,788 (25,000) 436 (29,613) (43,000) 1,599 Cash flows from financing activities Cash flows from financing : Cash was provided from Long-term loansCash was applied to : Long-term loansDividends Paid to shareholders of the company Dividend payment to minority interestsLong-term loansNET CASH FLOWS USED IN FINANCING ACTIVITIES Net increase/(decrease) in cash heldAdd opening cash brought forwardEnding cash carried forward - - - 15,664 - (29,613) - - (13,949) (17,288) - 5,568 - (11,720) - - (35,181) 5,568 - (29,613) - The accompanying notes form an integral part of these financial statements. Consolidated Statement of Cash Flows Statement Consolidated sion $’000 $’000 $’000 6 months to 6 Months to to 12 Months 31 December 2005 31 December 2004 30 June 2005 For the six months ended 31 December 2005 – unaudited 31 December six months ended For the These financial statements have been prepared in accordance with Financial Reporting Standard No.24 and should be Financial Reporting Standard No.24 and have been prepared in accordance with These financial statements Deferred taxation is calculated using the liability method on a comprehensive basis. Debit balances in the deferred tax Deferred taxation is calculated using the liability tax losses. As at 31 December 2005 there are no accumulated Solid Energy for any loss However under the Treaty of Waitangi (State Enterprises) Act 1988, the Crown will compensate 1. Accounting Entity Fuels Limited, its subsidiaries Solid Energy Renewable are for Solid Energy New Zealand Limited, These financial statements International Coal New Zealand Limited, Coal New Zealand CoalCorp Insurance Services Limited, Terrace Coal Mine Limited, Limited. Limited and Waikato Mining and Contracting Limited, Coal Bed Methane the 2005 Annual Report. read in conjunction with 2. Accounting Policies policies months ended 31 December 2005. The accounting in accounting policies during the six There have been no changes consistently applied. stated in the 2005 Annual Report have been 3. Operating Surplus Before Taxation Notes to the Financial Statements the Financial Notes to for rehabilitation costs at 31 December 2005 was $50.80 million (31 December 2004: $44.42 million, 30 June 2005: for rehabilitation costs at 31 December 2005 was $50.80 million (31 December 2004: $47.75 million). 7. Capital Commitments 2004: $7.0 million, 30 June 2005: Capital commitments as at 31 December 2005 are estimated at $1.0 million (31 December $3.1 million). Has been determined after charging Interest expense & similar chargesAfter crediting Interest revenue4. Income Tax of financial performance includes both the current year liability and the The income tax expense charged to the statement after allowing for non-assessable income and non-deductible expenses. income tax effects of timing differences differences and future income tax benefits arising from income tax losses carried account arising from net accumulated timing certainty of realisation. forward are only recognised if there is virtual 1,5855. of Property, Plant & Equipment and Mine Properties Valuation potential land claims that may The agreement by which Solid Energy purchased the business from the Crown recognises resulting from potential claims cannot be lodged under the Treaty of Waitangi Act 1975. The effect of the valuation of assets be quantified. 746that occurs upon the resumption of any interest in land by the Crown. 6. 690 Contingencies rehabilitate to an agreed condition, The Company is required, by various legislation controlling its mining activities, to The provi The final cost of rehabilitation cannot be established with certainty. the land on which its mining activities occur. 1,670 543 969
Solid Energy New Zealand Ltd and Group 2005 06 Solid Energy New Zealand Ltd and Group 2005 07 As at As at As at As at As at As at $’000 $’000 $’000 $’000 $’000 $’000 31 December 2005 31 December 2004 30 June 2005 31 December 2005 31 December 2004 30 June 2005 31 December 2005 31 December 2004 30 June 2005 $’000 $’000 $’000 $’000 $’000 $’000 Book Value Fair Value Book Value Fair Value Book Value Fair Value For the six months ended 31 December 2005 – unaudited 31 December six months ended For the Foreign currency forward exchange contract gain/(loss)Foreign currency options gain gain/(loss)Total Exchange rate at balance date (USD) - (674) - - - 1,595 2,269 0.6814 - 5,632 - - - 10,660 0.7184 5,028 - - - 546 - 0.6944 1,475 929 The company expects to deliver against all of its foreign exchange contracts during the normal course of business. The company expects to deliver against all of its foreign exchange contracts during the Contractual commitments existing at balance date are as follows: Up to 1 year1 year to 2 years2 years to 5 yearsOver 5 years 75,922 126,460 49,387 40,241 43,406 71,180 81,942 44,698 46,389 52,580 51,258 40,892 Up to 1 year1 year to 2 years2 years to 5 yearsOver 5 years 1,129 2,739 1,944 1,229 1,300 2,162 1,647 1,154 1,571 2,513 1,833 1,052 The estimated fair values (marked to market revaluation) of these financial instruments are as follows: The estimated fair values (marked to market revaluation) of these financial instruments Foreign currency forward exchange contractsForeign currency options Average exchange rate 62,851 38,718 105,406 0.6722 65,227 53,269 0.6180 77,799 0.6913 10. risk – foreign exchange contracts Off-balance sheet and option agreements are used to manage foreign currency exposure. It is Foreign currency forward exchange contracts receipts and major import payments. Fluctuations in foreign currency exchange Solid Energy’s policy to cover forward export been entered into with various counterparties having such credit ratings and rates gives rise to market risk. Contracts have forth by the Board of Directors. The notional principal or contract amounts in accordance with such dollar limits as set follows: outstanding as at 31 December 2005 are as 9. Performance Bonds and Guarantees The of performance bonds and guarantees with an acceptable level of reliability. It is not practical to estimate the fair value outstanding at 31 December 2005 totalling $10.8 million (December 2004: group has performance bonds and guarantees may be drawn down in the event the Group fails to perform under various $12.6 million, June 2005: $11.9 million) which in respect of these bonds. contracts and licenses. No loss is expected 8. Contractual Commitments Operating Leases and date are as follows: operating leases existing at balances Commitments to non-cancellable Notes to the Financial Statements the Financial Notes to (91) 2 (150) (9,746) (17,634)(1,808) (29,737) (486) (2,171) 38,008 17,477 6,364 17,426 11,669 61,088 43,789 11,028 35,394 $’000 $’000 $’000 6 months ended 6 months ended 12 months ended 31 December 2005 31 December 2004 30 June 2005 For the six months ended 31 December 2005 – unaudited 31 December six months ended For the Solid Energy has yet to quantify the effects of the future impact of transition to NZ IFRS, this will depend upon (a) ongoing Solid Energy has yet to quantify the effects NET SURPLUS AFTER TAXATION NON CASH ITEMS: DepreciationIncrease in deferred taxation assetAmortisationAmortisation of goodwillAmortisation of government bond premiumReversal of provisionsImpairment of fixed assets and mining propertiesExpense of Cobden Bridge DFAAmortisation of term portion of prepaymentsDiscount unwind on term provisionMOVEMENTS IN WORKING CAPITAL: Accounting payables and accruals 234Accounts receivable 3 -InventoriesStripping in advance 716Company tax 1,148 8,831 60 1,264 6,318 - 3 - - 650 (14,302) 5,488 2,693 50 1,055 3,275 30,611 6 - 17,410 - - 4,091 970 10,522 2,121 120 (4,873) 14,770 (7,593) (170) (4,064) (8,010) 2,373 (4,776) (7,867) (19,967) 2,049 (15,952) (3,448) 7,257 OTHER BALANCE SHEET MOVEMENTS: Term provisionsCurrent ProvisionsCrown receivableRehabilitation provision assetITEMS CLASSIFIED AS INVESTING/ FINANCING ACTIVITIES Surplus on sale of property, plant & equipment (1,168) (91) 1,412 (2,052) - (268) (1,083) 2 865 - (4,616) (3,178) (150) 1,233 4,390 NET CASHFLOWS FROM OPERATING ACTIVITIES 11. Standards to International Financial Reporting Impact of Adopting New Zealand Equivalents New Zealand and financial reporting from current process of transitioning its accounting policies Solid Energy is in the (NZ IFRS) which International Financial Reporting Standards (NZ GAAP) to New Zealand Equivalents to Accounting Standards resources the 2005 year, the company allocated internal financial year ended 30 June 2007. During will be applicable for the by the transition to identify key areas that would be impacted to conduct impact assessments and engaged expert consultants All of priority. to address each of the areas in order the company established project teams to NZ IFRS. As a result, given to the Audit and Risk committee. Priority has been be approved prior to implementation by the recommendations will of transition IFRS as at 1 July 2006, the company’s date balance sheet in accordance with NZ preparation of an opening prepares in the future, and is required when the Company the basis of accounting under NZ IFRS to NZ IFRS. This will form financial statements for the year ended 30 June 2007. its first complete set of NZ IFRS compliant teams; (b) potential amendments to NZ IFRSs and Interpretations thereof work being undertaken by the NZ IFRS project Financial Report Interpretations Committee; and (c) emerging accepted being issued by the standard-setters and International of NZ IFRSs. practice in the interpretation and application 12.surplus after taxation to net cash flows from operating activities Reconciliation of Notes to the Financial Statements the Financial Notes to
Solid Energy New Zealand Ltd and Group 2005 08 Solid Energy New Zealand Ltd
DIRECTORS Timothy E C Saunders Chairman – MBA, BCom (Economics) – Auckland Helen Cull QC BA, LLB (Hons) – Wellington Michael W Hawarden BSc (Mining Engineering), MA (Economics), PMD – Christchurch John Spencer BCom, FCA – Wellington Adrienne F Young Cooper BA, MSc (Resource Management) – Auckland John M Walters BA, LLB – Auckland Anthony G Williams Greymouth
CHIEF EXECUTIVE OFFICER Dr Don M Elder DPhil, BEng Hons (Civil)
ISSN 1176-2829 Solid Energy New Zealand Ltd 2 Show Place, PO Box 1303, Christchurch, New Zealand Tel: 64 3 345 6000, Fax: 64 3 345 6016 www.coalnz.com
September 5, 2006
ASX Announcement
EASTERN ACQUIRES SECOND COAL MINE IN NEW ZEALAND y Coal distribution centre for growing NZ business
Eastern Corporation Limited (Eastern) has announced that it will complete the acquisition of the coal mining operations of Straith Industries (Straith) in the far south of New Zealand’s South Island on Friday September 8.
The company also announced the purchase of a coal stockpile, blending and distribution facility centrally located between Eastern’s Straith and Cascade mines at Timaru.
Last year Eastern acquired the Cascade mine in the north west of New Zealand’s South Island, and is currently exploring 5 km north of Cascade at Whareatea West with the aim of proving up high quality coking coal for mine development.
With the Straith acquisition, Eastern will not only expand upon its already well- established presence via the Cascade mine, but, more importantly, will secure an operation in an area of New Zealand’s South Island where considerable market opportunities exist.
This acquisition is an important step in Eastern’s strategy of expansion in New Zealand. It is Eastern’s intention to build a robust, self sufficient mining operation there which will generate cash flow to fund the company in the development of its current projects and pursuit of new opportunities.
The Straith coal is predominantly sub-bituminous thermal coal, with increasing application in the domestic industrial coal market. The operations are located in three separate areas within the Ohai / Nightcaps region (CML 37079), where open cut and underground coal mining operations have been conducted for over 50 years. The main focus however will be the Nightcaps deposit.
All necessary mining permits and consents are now transferred and infrastructure is in place for production exceeding 100,000 tonnes per annum. Operations, initially by mining contractor, are scheduled to commence early October.
Confirmatory resource drilling conducted during the course of due diligence has confirmed an initial resource at Straith of 2.85 million tonnes Measured Resource (under the JORC reporting standards for mineral resources and ore reserves) with an in-situ linear ratio of less than 5 to 1. Coal qualities are in the middle range for New Zealand sub-bituminous coals. The main seam has been identified as the Morley seam, which is split into Upper Morley 1, 2 and 3.
Seam Name Resource Estimate
Upper Morley 1 1.30 mt Upper Morley 2 0.41 mt Upper Morley 3 1.14 mt Total in-situ Measured 2.85 mt
Eastern has also applied for Prospecting Permits over the region immediately adjoining CML 37079 where there is potential to increase the estimated tonnage through further exploration.
The purchase price of NZ$2 million (less than 7c per tonne) will be paid by Eastern out of existing cash reserves. A deposit of NZ $100k will be followed by two separate payments. NZ$1.5 million will be paid on settlement and the balance of NZ$500,000 within 12 months.
Eastern has also purchased the Somervilles Fuel Centre in Timaru for NZ $2.4 million. The Fuel Centre, to be known as Eastern Coal Supplies Limited, will be used as a coal stockpiling, blending and distribution point and is an important addition to Eastern’s New Zealand coal strategy. It is situated on the east coast of New Zealand’s South Island, approximately mid way between the Cascade and Straith mines and offers immediate access to several large industrial customers. Settlement is due to take place on Friday September 15.
The former owner has been employed by Eastern as New Zealand Transport and Marketing Manager. The port of Timaru could be considered for export of Eastern’s coal.
In Queensland’s Bowen Basin, Eastern is in joint venture with Mitsui in stage two of a feasibility study into a coking coal development at Broughton adjoining Rio Tinto’s Hail Creek mine.
MIKE O’BRIEN Chief Executive Officer
The information in this report that relates to the estimated coal resource for Straith is based on information compiled by Mr Ian Poppitt of Rockmode Proprietry Limited, who is a Member of The Australasian Institute of Mining and Metallurgy. Mr Poppitt has sufficient experience, which is relevant to the style of mineralisation and type of deposit under consideration and to the activity, which he has undertaken to qualify as a Competent Person as defined in the 2004 Edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’. Mr Poppitt consents to the inclusion in the report of the matters based on his information in the form and context in which it appears.
For further information please contact:
Miss Sam Aarons Manager-Business Development & Corporate Relations Tel: 07 3832 0855 Mob: 0418 906 621 Email: [email protected]